New Orleans Short Term Rental Housing Study DRAFT

USING STRS TO SUPPORT AFFORDABLE HOUSING

NEW ORLEANS SHORT TERM RENTAL AFFORDABLE HOUSING STUDY

JULY 2019

New Orleans Short Term Rental Study 2

The rapid spread of short-term rentals (“STRs”) in New Orleans has affected the housing market in neighborhoods throughout the city. In the past decade, the STR market has grown rapidly in cities around the world, as online platforms such as Airbnb and VRBO have facilitated STR marketing and transactions, and as entrepreneurs have found ways to operate hundreds of STRs at scale. In New Orleans, the number of STR listings has more than doubled in just the past three years. STRs make up approximately 3.5 percent of all occupied housing units in the city, one of the highest rates for similarly sized cities in the nation. The shift of housing units to STR use has reduced the availability of housing for New Orleans residents. This phenomenon has been concentrated in neighborhoods like Marigny, Bywater and Treme, where between 10 to 16 percent of occupied housing units are listed as STRs.

In response to growing community concern and the expansion of the STR market, the City of New Orleans (“the City”) is evaluating how to effectively regulate STRs. The City is considering a range of regulations (e.g. bans on non-owner occupied STRs in residential neighborhoods, licensing of STR operators and platforms, etc.) and new taxes and fees. Three different tax or fee policies have been proposed:

• Increasing the STR tax rate from 9.45% to 16.20%, to be directed towards infrastructure investments and tourism;• Increasing permitting fees in varying degrees, to be directed towards regulatory enforcement activities; and• Implementing policies to support affordable housing.

HR&A Advisors, Inc. and Urban Focus, LLC were engaged by the City to conduct a study (“the Study") and recommend policies related to housing affordability. The focus of the Study was specifically to determine how commercial STRs can be used to support affordable housing. Here, “commercial” refers to an STR permit for STRs located in commercial zoning districts. This study does not address “residential” STRs, a category that includes the single-family STRs that dominate many neighborhoods.

The Study evaluates each of the City’s proposed policies to support affordable housing. The study does not evaluate policies—such as a citywide cap on the concentration of STRs—that do not have a direct effect on affordable housing.

1. Nightly Impact Fee: a fixed fee charged for each night of STR occupancy. This fee is currently charged a at a rate of $1 per occupied night and goes towards the Neighborhood Housing Investment Fund. The City has proposed an increase in fees to levels of $5, $8, or $10 per occupied night.

Recommendation: The City should apply a $10 nightly fee for commercial STRs, the highest fee proposed. The proposed $10 fee would be one of the largest STR impact fees dedicated to affordable housing in the nation. Together, a $10 commercial fee and a $5 residential fee would generate $6.7 million annually.

The key benefits of the nightly impact fee policy are that it is straightforward to implement and enforce, applicable to all operators, and easy to adjust. The fee applies evenly to all STR units regardless of status and location, which limits the ability of operators to find loopholes to avoid the fee. Additionally, the fee level itself can be adjusted in the future, as appropriate.

Alternatively, the City could layer the nightly impact fee with a one-time upfront conversion fee of $2,500 per unit for all residential units converting to STRs. a reduced fee of $8 per night is recommended to compensate for the upfront cost. The conversion fee would not apply to units that are newly constructed or renovated that were approved for development as STRs. This fee would serve to disincentivize conversions of existing residential units to STRs, which directly impact the residential housing market by removing units available to residents.

EXECUTIVE SUMMARY | SHORT-TERM RENTAL AFFORDABLE HOUSING STUDY

BACKGROUND

POLICY OVERVIEW AND RECOMMENDATIONS


2. Unit Requirement: a requirement to provide subsidized affordable units in return for STR permits. The City has proposed a 1:1 ratio of STRs to affordable units for each STR above a 25% cap. There are no known precedents for a unit requirement policy tied to STRs in the U.S..

Recommendation: The City should not pursue the unit requirement policy. Although the policy is financially feasible at certain ratios, the policy’s potential benefits are undermined by several serious implementation challenges:

• The duration of an STR permit, one year, is too short to provide stable affordable housing. Currently, permits are annual, which would mean that the affordability of a unit is not guaranteed past a year. To secure a longer period of affordability, the City could issue a longer-term permit for three-year periods.

• This policy would not work in buildings without common ownership or management, such as condominiums. Without common ownership, there is no way to enforce the requirement that a unit be provided at an affordable rent since no single owner controls multiple units.

• The policy would require an extensive and ongoing monitoring and enforcement systems that diverts funds away from affordable housing. The City does not currently have a system or staff to support the enforcement of a unit requirement and would have to invest to create one.

These challenges could be addressed if the City were to commit to investing in the upfront design and ongoing administration of the program.

Financially, the Study found that a 6:1 ratio is supportable across the city, while several select neighborhoods can support a lower ratio. While the City could apply a different ratio requirement in different neighborhoods, this would make a complicated program more complicated.

3. Building Conversion Fee, Residential/STR Use to Lodging Use: a fixed one-time fee charged on every unit within a building that converts housing to hotels, timeshares, and other lodging land uses (excl. STRs).

Recommendation: The City should apply a $12,300 one-time per-unit conversion fee to residential buildings (including STRs) converting to a lodging use. This would not apply to newly constructed or renovated hotels, or to existing hotels overtaken by an STR operator.

The recommended STR nightly impact fees will push STR taxes and fees above those of hotels. The conversion fee is intended to discourage operators from avoiding the nightly impact fee by converting previously residential buildings to lodging uses.

4. STRs as an Inclusionary Zoning Tool: STR permits provided as an incentive for developers who are building properties through the Inclusionary Zoning program.

Recommendation: The City should allow STR permits to be an optional incentive for IZ. STR permits can be provided as an incentive to provide additional affordable units.

Using STRs as an IZ policy will reduce the amount of tax abatement the City provides. The City can also leverage the administrative infrastructure surrounding IZ to monitor STR compliance.

EXECUTIVE SUMMARY | SHORT-TERM RENTAL AFFORDABLE HOUSING STUDY

POLICY OVERVIEW AND RECOMMENDATIONS (CONTINUED)


HR&A Advisors, Inc. is an employee-owned industry-leading real estate, economic development and public policy consulting firm. We are a firm of urban planners, economists, and policy analysts who care deeply about the future of America’s cities and have worked to make cities vibrant and vital. HR&A has provided strategic advisory services for some of the most complex mixed-use, neighborhood, downtown, campus, and regional development projects across North America and abroad for over forty years. We serve a range of clients including governments, community development organizations, hospitals and universities, cultural institutions, and developers.

The character and distributional impacts of growth are important, and HR&A’s Affordable Housing and Inclusive Cities practices work to advise our public and private clients on policies and strategies that foster economic mobility, equity, and access. As the American city confronts increasingly urgent challenges of inclusion and equitable development, HR&A has been at the forefront of leveraging and adapting resources to better serve public needs, as evidenced through our extensive project experience.

ABOUT HR&A ADVISORS

PROJECT EXPERIENCE | AFFORDABLE HOUSING PROJECT EXPERIENCE | INCLUSIVE CITIES

Atlanta Equitable Housing Needs Assessment HR&A developed an equitable housing needs assessment for the City of Atlanta to inform housing development as Atlanta moves towards its population growth target. HR&A performed a financial feasibility analysis and assessment of existing affordable housing tools to develop recommendations for improving the City’s current toolkit and implementing changes to mediate projected shortfalls. HR&A worked closely with stakeholders and the Atlanta Office of Housing and Community Dev. to develop the final housing needs assessment and implementation road map.

Detroit Multifamily Affordable Housing StrategyTo guide the City of Detroit’s future initiatives related to affordable housing development and preservation, inclusive growth, and homelessness, HR&A worked closely with the City to develop a public-facing housing strategy document that expressed housing priorities and established a formalized plan for implementation. The City released its Multifamily Affordable Housing Strategy in 2018. As the first strategy of its kind in Detroit in decades, the document is guiding the City’s future work of ensuring equitable growth and residents of all incomes have access to quality housing.

Philadelphia Poverty Reduction StrategyHR&A analyzed strategies to reduce the city’s poverty rate. Though Philadelphia’s real estate market has recovered since the recession and average household incomes have grown substantially, over 26% of residents are currently in poverty, the highest rate among the ten largest cities in the U.S. HR&A assessed ideas related to housing, workforce development, and increasing utilization of State and City programs, and helped prioritize these programs and establish a framework for assessing effectiveness.

Creating a Racial Equity Agenda for the U.S. Conference of Mayors Across the country, discriminatory historical policies have led to lasting disparities in social and economic outcomes across race. The U.S. Conference of Mayors made it a priority to effect changes in policy and governance as it relates to these matters. HR&A designed a program to guide Conference in building the capacity of mayors and their staff, providing recommendations for elevating the need for government to proactively target racial equity, and supporting cities to make meaningful change in how departments make decisions and allocate budget with the goal of reducing racial disparities.

FIRM OVERVIEW

http://detroitmi.gov/Portals/0/docs/SOTC/Detroit_Multifamily_Affordable_Housing_Strategy_2018.pdf


ABOUT HR&A

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HOUSING EXPERIENCE | PREVIOUS AND CURRENT PROJECTS

New Orleans Short Term Rental Study

TABLE OF CONTENTS

OVERVIEW

MARKET CONDITIONS

BUSINESS MODELS

FINANCIAL IMPLICATIONS

POLICY EVALUATION

RECOMMENDATIONS

6


City Council reconsiders STR policies,2018 STR Study conducted by CPC

2018

New Orleans engaged HR&A and Urban Focus to evaluate the feasibility and implications of using STR policies to support housing.

7

“For [commercial] short term rentals, using research that includes the forthcoming inclusionary zoning financial feasibility study, recommend provisions to create affordable housing.”

– City Council Motion M-19-4

Timeline of STR Regulations

2015 Short Term Rental Study conducted by City Planning Commission (CPC)

2015

Initial STR policies enacted

2017

HR&A Team engaged

2019


Assess STR market

conditions and business

landscape

Model and measure financial

performance of STRs

Evaluate benefits and limitations of proposed

policies

The HR&A Team undertook the following process to develop recommendations to tie affordable housing policies with STRs.

8


Occupancy Tax

Occupancy Taxes

Generate revenues for infrastructure investment

The City has proposed several taxes and fees as updates to its set of existing STR policies. Each affects the financial feasibility of STRs.

Permitting Fees

Generate revenue for administration and enforcement of STR regulations*

9

Commercial Permits**

9.45%current

16.2%proposed

$500current

$5Kproposed

$0current

$1Kproposed

Housing Requirements

Generate revenue for affordable housing

Owners Operators

$1/nightimpact fee

current

proposed additional fee and unit

requirements

*In addition to commercial permit fees, the City has also proposed additional residential permit and platform permit fees.**The proposed owner permit fees would be required for each unit, while the proposed operator permit fee would apply to each operator entity.


Increasing other fees on STR units reduces the STR value that is available to support housing initiatives.

10

Note: Ratios were calculated for the Central Business District and are meant to be illustrative.

Today's Conditions + Raise Taxes to 16.2% + New Permit Fees

Additional tax revenue for

infrastructure

Additional tax revenue for

infrastructure

Additional permitting fees for

enforcementValue premium

Value premium

Value premium

Baseline ScenarioProposed in Latest

Legislation

In this study, HR&A assumes a baseline scenario where the occupancy tax rate increases to 16.2% and the commercial STR permit fee remains at $500.

Available to support affordable housing


Unit Conversion Fee, →STR

Nightly Impact Fee

Fee-based policies

Generate revenue used to support affordable housing (e.g. via NHIF)

The City is currently considering STR legislation that would support affordable housing through two types of policies.

Unit-based policies

Require the creation of affordable units in exchange for STR permits

11

Tool to Support Inclusionary

Zoning

Unit Requirement

$1current

$10proposed

--current

TBDproposed

--current

1:1 above 25% cap

proposed

--current

ALLOWproposed

Land Use Conversion

Fee, →Lodging

--current

TBDproposed


Level of public benefit

produces and/or preserves housing affordability

Financial feasibility

private actors can support public goals given market conditions

Alignment with dynamics of STR industry

considers variation in business models, risk tolerance, etc.

Enforceability

not onerous or impossible to enact

The proposed affordable housing policies were evaluated against four criteria.

12

1

2

3

4


4. Land Use Conversion

Fee, →Lodging

These policies are intended to apply to different entities and serve different purposes.

13

2. Unit Conversion Fee, →STR

1. Nightly Impact Fee

5. Tool to Support IZ

3. Unit Requirement

Could Apply to

All commercial STR Units*

Residential buildings

converting to lodging land use

New multifamily development

*The nightly impact fee would also apply to residential zoning permits.




Based on identified needs and financial feasibility findings, the HR&A Team recommends pursuing the following set of policies.

14


3. Unit Requirement


Fee, →Lodging

Recommend

$10 Nightly Impact Fee only Do not enact due to implementation

challenges

$12,300/Unit Land Use

Conversion Fee

Add to incentive options$8 Nightly Impact Fee +

$2,500 Unit Conversion Fee

Mandatory or Optional

Mandatory Mandatory Mandatory**If STRs included, use to

add additional affordable units OR pay fees

Should Apply to

All STRsResidential units converting to STR

(future, not retrospective)

Buildings converting from residential to lodging land use

Developers pursuing new development

When Imposed

Per occupied nightOne-time charge at

conversionOne-time charge at change in land use

One-time, at IZ incentive agreement

Citywide Impact

$6.2M ($8 comm, $5 resi)$6.7M ($10 comm, $5 resi)

Dependent on level of conversion activity

57 Units*(6:1 ratio between STR and affordable units)


Dependent on level of development activity

Option 1:

OR Option 2:

Financial feasibility of policies based on 16.2% tax on STR units and $500 commercial permit fee. Projected impact assumes full compliance.*Nightly impact fee may be applied to other STRs to not subject to the unit requirement.**Does not apply to newly constructed hotels or to existing hotels taken over by STR operators.


TABLE OF CONTENTS

OVERVIEW

MARKET CONDITIONS

BUSINESS MODELS


POLICY EVALUATION

RECOMMENDATIONS

15


Short-term vacation rentals are nothing new, but new business models and online platforms have led to their proliferation.

16

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18

Growth in STR Listings in New Orleans

Note: Includes all listings on Airbnb and Homeaway platforms, which includes a small number of non-STR units. As of early 2019, around 3% of units on platform are self-identified as a lodging use (hotel, B&B, etc.).Source: HR&A Team analysis of data from Inside Airbnb and AirDNA

As of early 2019, there are now more than 8,500 distinct active listings on the major online STR platforms Airbnb and HomeAway.

~3,200

~8,500


3.5 percent of housing units in the City are offered as STRs, though this share varies dramatically by neighborhood.

17

Central Business District 46%

Marigny 16%

Treme-Lafitte 14%

Bywater 10%

French Quarter (banned) 6.8%

Garden District (banned) 3.5%

Citywide Average 3.5%

New Orleans Neighborhoods New Orleans vs. Peer Cities

New Orleans 3.5%

Charleston, SC 3.5%

Savannah, GA 3.4%

Nashville, TN 2.9%

Austin, TX 2.1%

Los Angeles, LA 1.5%

New York City, NY 1.2%

Note: Share is representative of non-hotel, whole-unit listings for all New Orleans data. Non-hotel whole-unit listings count was unavailable for other cities, for which a direct ratio between all whole-unit listings and occupied housing units is provided. This ratio is 5.5% in New Orleans.Source: HR&A Team analysis of data from AirDNA, The Data Center, and U.S. Census

Whole-Unit STRs as a Share of Occupied Housing Units


STRs are overwhelmingly concentrated in central neighborhoods of the city, such as the CBD, Treme, and Marigny.

18

Neighborhood# of STRs

(Non-Hotel)Share of STRs (Non-Hotel)

Central Business District 891 14%

Central City 427 7%

Seventh Ward 435 7%

Treme-Lafitte 361 6%

Mid-City 351 6%

Marigny 322 5%

Lower Garden District 264 4%

Bywater 214 3%

These top eight neighborhoods represent over 50% of STRs in the city.

Source: HR&A Team analysis of AirDNA and U.S. Census data

0 1 2STRs per Acre


Residential Zoning*

Within New Orleans, there are generally two categories of STR licenses, determined by zoning.

Commercial Zoning

19

Temporary License

Accessory License

Commercial License

Large Residential

License

Commercial License

Small Residential

License

2015 to present

Currently proposed

Partial-Unit License

*Residential STRs represent a larger portion of the overall market but are not included in this study.


The analysis at hand focuses on regulation of commercial STRs, as defined by zoning status.

20

Commercial


TABLE OF CONTENTS

OVERVIEW

MARKET CONDITIONS

BUSINESS MODELS


POLICY EVALUATION

RECOMMENDATIONS

21


The financial value generated by STRs is realized by three parties.

22

Platforms

Facilitate the transaction, including collection and disbursal of revenues and fees

STR Operators

Oversee rental operations and maintenance, e.g. cleaning, furnishing, pricing

Building Owners

Own the property and ultimately determine its usage, i.e. STR vs. different use


PlatformsSTR OperatorsBuilding Owners

These parties vary in size and nature, and their roles can overlap.

23

Single-family homeowners

Multifamily property owners

Self-Operators

Some property owners, typically smaller scale ones, will self-operate

Proprietary Platforms

Most larger scale operators have their

own platforms

And many more…


As the STR market in New Orleans matures, units are increasingly being run by larger operators.

24

1,4372,882

522

1,136

6552,944

Jun

-15

Au

g-1

5

Oct

-15

De

c-1

5

Feb

-16

Ap

r-1

6

Jun

-16

Au

g-1

6

Oct

-16

De

c-1

6

Feb

-17

Ap

r-1

7

Jun

-17

Au

g-1

7

Oct

-17

De

c-1

7

Feb

-18

Ap

r-1

8

Jun

-18

Au

g-1

8

Oct

-18

De

c-1

8

Feb

-19

Ap

r-1

9

1 2 3+Note: Airbnb listings onlySource: HR&A Team analysis of Inside Airbnb data

25%

55%

42%

41%

Number of listings per operator:

Share of Airbnb Units by Size of Operator

(“Enterprise” operators)


There are at least three distinct STR business models, each of which represents a different relationship between the owner and operator.

25

3. Master Lease Operator: Operator leases units from a building owner, often for 3+ years. Only several larger operators do this.

2. Management Fee Operator: Building owner pays a third-party manager a share of revenues to help operate STRs. Works at all scales.

1. Self-Operator: Building owner operates units on own. Typically a smaller-scale operation.


3. Master Lease Operator

2. Management Fee Operator

1. Self-Operator

The key difference between these models is how value flows between the different parties.

26

STR Revenue

Owner-Operator

Owner

Operator

STR Revenue

STR Revenue

Traditional Expenses

STR Expenses

OperatorFee STR Expenses

All Expenses

OwnerLease Tradit. Expenses

Owners and operators then take care of the related expenses and share in the earnings. The specific breakdown of responsibilities varies by contract.

Within each model, STR revenues flow to different entities. Currently, these entities are the ones holdings the STR permit.


TABLE OF CONTENTS

OVERVIEW

MARKET CONDITIONS

BUSINESS MODELS


POLICY EVALUATION

RECOMMENDATIONS

27


To evaluate financial feasibility, HR&A first considered the size of the STR “value premium” over traditional rental units.

28

Net Income for a

Traditional Rental Unit

Net Income for a Short-Term Rental

STR Value Premium

Once this value is defined and measured, we can assess the financial feasibility of a variety of policies by using this value impact as a threshold.

Net Income = Revenue - Expenses


HR&A calculated the STR value premium based on value captured by both owners and operators.

29

Owner Calculation:

Owner Revenue Owner ExpensesNet Income for

Traditional Rental

Owner Value

Premium– – =

Operator Revenue

Operator Expenses

Required ReturnsOperator

Value Premium

– – =

Operator Calculation (if operator is distinct from owner):

Total Value

Premium


Value premiums are highly variable across units, with two key factors influencing the value of STRs relative to traditional rentals.

30

Location: What is the relative appeal of the neighborhood, block, or building to long-term residents vs. visitors occupying STRs?

Unit Bedrooms: What is the relative demand and “willingness to pay” for unit types (1BR, 2BR, 3BR, etc.) by long-term residents vs. visitors?

1

2


Neighborhood-level premiums are determined by the strength of the residential market relative to the strength of the hospitality market.

31

$0

$5

$10

$15

$20

$25

$30

$35

$40

CENTRAL BUSINESS DISTRICT LOWER GARDEN DISTRICT SEVENTH WARD

Th

ou

san

ds

Traditional Rental Revenue STR Revenue

Neighborhoods with lower long-term rents do not necessarily have low STR pricing.

STR vs Traditional Rental Annual Gross Revenues, Various Neighborhoods

+58% +91%

+180%

Sources: HR&A Team analysis of CoStar and AirDNA data


Across all locations, STR premiums increase for larger units.

32

STR vs Traditional Rental Annual Gross Revenues by Unit Size, CBD

The high value premium for larger units has contributed to the concentration of STRs in residential neighborhoods, where housing units are larger.

$0

$10

$20

$30

$40

$50

$60

$70

$80

Studio/1BR 2BR 3BR

Th

ou

san

ds

Traditional Rental STR

+31%

+32%

+65%

Sources: HR&A Team analysis of CoStar and AirDNA data


TABLE OF CONTENTS

OVERVIEW

MARKET CONDITIONS

BUSINESS MODELS


POLICY EVALUATION

RECOMMENDATIONS

33


Level of public benefit

produces and/or preserves housing affordability

Financial feasibility

private actors can support public goals given market conditions

Alignment with dynamics of STR industry

considers variation in business models, risk tolerance, etc.

Enforceability

not onerous or impossible to enact

The proposed affordable housing policies were evaluated against four criteria.

34

1

2

3

4




Based on identified needs and financial feasibility findings, the HR&A Team recommends pursuing the following set of policies.

35


3. Unit Requirement


Fee, →Lodging

Recommend


challenges


Conversion Fee






Should Apply to





When Imposed




Citywide Impact






Option 1:

OR Option 2:



The Nightly Impact Fee could generate a significant amount of revenue and is generally financially feasible.

36

Level of Public Benefit Financial Feasibility

Nightly Impact Fee | Financial Considerations

Fee Level Revenue Per Unit Citywide RevenueEquivalent Affordable

Units**Financially Feasible

for Average STR?

Commercial Nightly Impact Fee

$1 $140 $255K 50 Yes

$5 $700 $1.3M 260 Yes

$8 $1,120 $2.0M 415 Yes

$10 $1,400 $2.5M 520 Yes

Residential Nightly Impact Fee*

$1 $125 $835K 170

$5 $625 $4.2M 860

Total N/A $6.7M 1,380

* The economic viability of higher residential nightly impact fees were not evaluated as part of this study**Equivalent unit calculation based on annual subsidy cost provided to two-bedroom units affordable to households at 60% AMI


The Nightly Impact Fee is a relatively straightforward policy: it is uniformly implementable, adjustable, and well-precedented.

37

Alignment with Industry Dynamics Enforceability

+ Uniform impact: A nightly fee applies to all building and unit types, with impact proportional to performance (total fee tied to occupancy).

+ Flexible: A fee is simple to modify and update.

+ Straightforward calculation

+ Well-precedented: Many existing examples exist, including in New Orleans.

~ Unreliable collection mechanisms: Enforcement gaps exist, given currently inconsistent remittances. Path to enforcement is clear but unreliable: collaboration with the platforms is required.

~ Some market distortion: For owners and properties at the margins of profitability, the increase in fee may incentivize noncompliance (such as avoiding cooperative platforms) or exit from the market.

Nightly Impact Fee | Implementation Considerations

City Existing Nightly Impact Fee

New Orleans

$1

Nashville $2.50

Portland $4

Seattle $8 – 14 + Positive~ Neutral or weak! Critical challenge



+ Discourages residential conversions: This fee disincentivizes situations where existing residential units are directly removed from the market for STR use.

! Infeasible at higher fee levels: A high fee would deter much of the market from complying due to a strong impact on profitability.

A fee for residential units converting to STR should be priced as an alternative to the nightly fee, which raises feasibility challenges.

38

Unit Conversion Fee → STR| Financial Considerations

Nightly Fee Equivalent*

Conversion Fee Per Unit*

Equivalent “STR : Affordable Unit” Ratio

Financially Feasible?

$1 $1,200 4:1 Yes

$2 $2,500 2:1 Yes

$5 $6,100 4:5 No

$10 $12,300 2:5 No

*Present value of a nightly impact fee at this level, over 10 years, assuming occupancy remains at present levels

+ Positive~ Neutral or weak! Critical challenge


The unit conversion fee (→ STRs) is more challenging to price and impose than an impact fee, though it may be easier to enforce.

39


+ Flexible, with some challenges: Can be applied to most building and unit types.

! Market distortion: Financial impact of an upfront fee will harm smaller operators more than larger, well-resourced operators. The City will need to define which types of operators and situations this fee applies to.

+ Clear point of contact for collection: Fee can be tied to permitting process, requiring only a one-time collection.

! Increases likelihood of noncompliance: Because fee is tied to permitting, only permitted units will pay (vs with nightly impact fee, all units remit a tax if transaction occurs via certain platforms).

Unit Conversion Fee → STR| Implementation Considerations



The City could consider combining a nightly impact fee with a unit conversion fee.

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Option 1: $10 nightly fee Option 2: $8 nightly fee + $2,500 conversion fee*

+ Annual Revenue Impact: $6.7M

~ Additional Public Impacts: None significant.

~ Some market distortion: For owners and properties at the margins of profitability, the increase in fee may incentivize noncompliance (such as avoiding cooperative platforms) or exit from the market.

~ Annual Revenue Impact: $6.2M + fees for conversions that year.

+ Additional Public Impacts: Disincentivizes residential conversions.

! Stronger market distortion: Financial impact of an upfront fee will harm smaller operators more than larger, well-resourced operators. The City will need to define which types of operators and situations this fee applies to.

Nightly Impact Fee + Unit Conversion Fee → STR


*Note that the unit conversion fee would be layered on top of the nightly fee: those who pay the former would still pay the latter.The unit conversion fee would apply to future conversions, not past ones.


The unit requirement’s public benefits are comparable to those of the nightly fee.

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Unit Requirement | Financial Considerations


+ Direct creation of affordable units: Generates on-site affordable units.

~ Uneven financial impacts: Easier for some owners or operators to meet this requirement than for others.

~ Feasibility varies neighborhood by neighborhood and building by building. Some neighborhoods can support better ratios then others.

Citywide Impact:

6 : 1STRs unit affordable

at 60% AMI

*If applied to all commercially zoned whole-unit apartment STRs with 6+ units. This indicates 57 per year, not 57 “additional” per year.Citywide benefits may include additional fee revenue generated by commercial STRs that do not qualify for the unit requirement, if a nightly impact fee is layered.

** The feasible ratio varies greatly from neighborhood to neighborhood. The ratio of 6:1 is set to be feasible in all neighborhoods with large numbers of commercial STRs.

Feasible Ratio**:

57 unitsCreated within

qualifying properties*+ Positive~ Neutral or weak! Critical challenge


The unit requirement policy poses significant implementation challenges that undermine the policy’s actual impact.

42


~ Mismatch in timing: Length of STR permit and length of housing affordability differ. This issue can be solved, but it adds an additional layer of complexity.

! Inapplicability to all buildings: A unit requirement is only fitting for larger buildings (10+ units) with common ownership, and it has a highly uneven impact across neighborhoods.

! Mismatch in manager sophistication: Providing affordable units requires technical sophistication and familiarity with affordable housing, which some STR owners and operators may not have.

! Technical difficulty in enforcement: The direct provision of affordable units will involve many layers of additional protocols, such as income verification, continued monitoring, etc. No city has developed an enforcement mechanism for this requirement.

! Strong distortion likely: Affordable unit requirements set at a ratio encourage owners and operators to “game” requirements (i.e. include five STRs in a property to avoid policy imposed at sixth STR).

Unit Requirement | Implementation Considerations



A conversion fee for residential properties converting to a lodging land use can be priced to equal the “avoided” STR impact fees.

43

Building Conversion Fee → Lodging | Financial Considerations


+ Encourages desired behavior: Discourages STRs from converting to hotel in order to avoid higher STR fees.

+ Revenue dependent on market activity: Total number of conversions will determine revenue generated by conversion fee.

~ Structured to prevent avoidance: Priced as a deterrent that is equal to long-term value of the nightly impact fee.

Nightly Fee Equivalent*

Building Conversion Fee Per Unit*

$1 $1,230

$5 $6,100

$8 $9,800

$10 $12,270

*Present value of a nightly impact fee at this level, over 10 years, assuming occupancy remains at present levels



The building conversion fee does not apply to every STR and serves primarily to prevent the effective removal of residential properties.

44


~ Limited applicability: Applies only to buildings converting from residential to lodging land uses.

~ Aligned with future market conditions: Fee structured to equal the future impact fees that would otherwise be avoided by the land use conversion, reducing incentive to convert land use to avoid STR housing policies.

+ Clear point of contact for collection: Fee can be tied to permitting process, with one-time collection at change in land use designation.

Building Conversion Fee → Lodging | Implementation Considerations



Because IZ is applicable only to new development, STR incentives should be established as an alternative to the citywide STR policy.

45

IZ Incentive | Financial Considerations

Level of Public Benefit Developers should be presented with two options for

providing affordable units beyond the base IZ requirement:

Base IZ Policy

STR Option 1: IZ STR Policy

STR Option 2: Citywide STR Policy

~ Impact dependent on market activity: Total units produced is dependent on new multifamily development occurring in locations subject to meeting IZ requirement.

Financial Feasibility~ Feasible under current market

conditions:

6 : 1One affordable unit (60% AMI) per six STR permits

STR Permits

Meet citywide STR policy supporting housing

STRs unit affordable at 60% AMI

Affordable Requirement Incentives

5 - 10% of units at 60% AMI

Density Bonus, Reduced Parking, PILOT, RTA

+

OR



Using STRs as an IZ incentive is unprecedented nationally, but it would be possible to implement STRs as part of the City’s policy.

46


~ Mismatch in timing: Length of STR permit and length of housing affordability differ. This issue can be solved, but it adds an additional layer of complexity.

~ Limited applicability: Applicable only to developers who are subject to meeting an IZ requirement.

+ Clear point of contact: Enforcement can be aligned with enforcement of IZ policy.

~ Lack of clear underwriting standards: STRs are still an emerging use and may be difficult to consistently underwrite.

IZ Incentive | Implementation Considerations



TABLE OF CONTENTS

OVERVIEW

MARKET CONDITIONS

BUSINESS MODELS


POLICY EVALUATION

RECOMMENDATIONS

47




Summary of Policy Evaluation

48


3. Unit Requirement


Fee, →Lodging

Level of Public Benefit

+ $6.7M/yr ($10 commercial fee, $5 residential fee)

OR

+ $6.2M/yr ($8 commercial fee, $5 residential fee) + $2,500 per residential conversion

+ Disincentivizes residential conversions

+ 57 units (plus some impact fee revenue if layered with the nightly impact fee)

+ Direct creation of units

~ Dependent on level of conversion activity

+ Disincentivizes conversions to lodging uses

~ Optional incentive; Impact depends on market activity

Financial Feasibility

+ Feasible at all reviewed levels

+ Feasible at $2,500

~ Feasible at 6:1 ratio for primary neighborhoods

~ Uneven financial impact

~ Structured to prevent avoidance: $12,300 fee per unit

~ Feasible at 6:1ratio

Industry Alignment

+ Uniform impact+ Flexible+ Straightforward to calc+ Well-precedented

+ Flexible~ Applicable to only new

conversions ! Uneven impact: smaller

operators harder-hit

~ Mismatch in timing! Inapplicable to all

buildings! Mismatch in manager

sophistication

~ Limited applicability~ Sized to align with

foregone nightly fee revenue

~ Mismatch in timing~ Limited applicability

Enforceability~ Unreliable collection

mechanisms~ Some market distortion

+ Clear point of contact for collection (permitting)

! Increases likelihood of non-compliance

! Technical difficulties! Strong market

distortion likely

+ Clear point of contact for collection

+ Clear point of contact for enforcement

~ Lack of clear underwriting standards

Financial feasibility of policies based on 16.2% tax on STR units and $500 commercial permit fee. Projected impact assumes full compliance.





49


3. Unit Requirement


Fee, →Lodging

Recommend


challenges


Conversion Fee






Should Apply to





When Imposed




Citywide Impact







Option 1:

OR Option 2:

Summary of Policy Recommendation


APPENDIX

A. PRECEDENT STR HOUSING POLICIES

B. STR BUSINESS MODELS

C. FINANCIAL ANALYSIS METHODOLOGY

50


To establish a baseline understanding of precedent for policies being considered by the City of New Orleans, the HR&A Team explored existing STR housing policies enacted in other parts of the country—reviewing relevant city- and state-level legislation, researching publicly available information on STR policies, and interviewing and corresponding with city staff in multiple cities including Nashville, Maui, Boston and San Francisco.

This review is not a comprehensive assessment at every city’s STR policy. Rather, it is focused on cities whose policies include mechanisms to provide funding for affordable housing and homelessness programs. The HR&A Team also assessed peer cities in the hospitality market such as Nashville, Austin, Charleston and Savannah to identify what, if anything, they are doing to regulate STRs in support of housing. The impact of STRs on housing is an emerging challenge, and proposed or enacted solutions to address housing concerns vary.

This study focuses specifically on commercial STRs, which are located in commercially-zoned areas of New Orleans and distinguished from residentially-zoned STRs. Distinguishing STRs by zoning type is not typical in other cities studied.

The most common mechanism in use is a direct tax on revenue generated by STRs. In most cases, residential and commercial STRs are taxed or charged at the same rate. No active policies were found that tie STRs to inclusionary housing policies or affordable housing requirements.

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Definitions in New Orleans*:

Short-Term Rental (STR): Rental of all or any portion thereof of a residential dwelling unit for dwelling, lodging or sleeping purposes to one party with duration of occupancy of less than thirty (30) consecutive days. Hotels, motels, bed and breakfasts, and other land uses explicitly defined and regulated in this ordinance separately from short term rentals are not considered to be short term rentals.

Commercial Short-Term Rentals: An entire dwelling unit in a non-residential district that rents no more than five (5) guest bedrooms for overnight paid occupancy.

OVERVIEW

*Per the 2018 New Orleans Short Term Rental Study

A. Precedent STR Policies



52

In many states, STRs—as well as hotels—pay both an occupancy tax and a sales tax as a share of gross revenue. Typically, these taxes are the burden of the STR operator, and are often collected and remitted by transactional platforms such as Airbnb, which voluntarily collect these taxes as part of each guest transaction. Not all platforms can or do provide this service, and the difficulty of fee remittances adds a layer of complexity to monitoring policy compliance. These taxes are typically imposed and collected by the state, but they can also be imposed at the city level depending on local policy.

Nightly impact fees are actual dollar-value fees that are due each night a unit is occupied. These impact fees are often directed to a specific purpose, such as an affordable housing fund. Impact fees are typically legislated at the city level—state legislation is not required—and then collected by the city.

The most common form of STR policies supporting housing are taxes or impact fees tied to STR occupancy. In addition to New Orleans, which has an existing $1 nightly impact fee in place that supports affordable housing, there are well-established precedents across the country for taxes and nightly fees dedicated to housing uses. Fees directed to housing uses range from a 0.5% tax in Boston to an $8-14 nightly fee in Seattle.

While permit fees can sometimes act as a type of conversion fee, there is no precedent for conversion fees. A conversion fee is a fee imposed on units converting to a use that is believed to detract from a public goal, such as the preservation of residential land uses. Such a fee is applied to units converting from traditional residential uses to STR use, or to buildings converting from a residential land use (including STRs) to a lodging land use (such as hotel). There is currently no existing precedent for conversion fees for residential units becoming STR units. However, depending on permitting fee levels in place to operate STRs, permit fees function similarly to conversion fees.

UNIT-BASED POLICIES

There is no existing precedent for of a city or state permitting STRs in exchange for the development of affordable housing units. However, there are many examples of localities dedicating portions of their revenue tax or impact fee revenues to an affordable housing fund to support the provision of affordable units.

The City of Boston noted that it is interested in exploring the option of tying inclusionary units to STRs or corporate apartments, but the City has not determined how to structure such a policy.

More complex regulations lead to more operators working outside of the system. In New Orleans, many operators currently operate without STR permits or with expired permits. Others are seeking alternative means—such as permits for lodging uses—to avoid the uncertainty of STR regulations.

FEE-BASED POLICIES


City Impact Fee STR Tax Hotel Tax Tax Parity? Taxes or fees supporting housing issues

Seattle, WA $8-14 per nightly stay 17.10% 17.10% Yes $8 – 14 nightly impact fee

Portland, OR $4 per nightly stay 13.50% 13.50% Yes 6% STR tax plus $4 nightly impact fee

Nashville, TN $2.50 per nightly stay 14.50% 14.50% Yes --

New Orleans, LA $1 per nightly stay 15.20% 15.20% Yes (pending) $1 nightly impact fee

Boston, MA 2.75% 12.20% 12.20% Yes 0.50% STR tax

Plymouth, MA 3.00% 11.70% 11.70% Yes 1.05% STR tax

Crested Butte, CO -- 18.40% 18.40% Yes 5.00% STR tax

San Antonio, TX -- 16.75% 16.75% Yes --

Cincinnati, OH -- 16.75% 16.75% Yes 6.00% STR tax

Austin, TX -- 15.00% 15.00% Yes --

Charleston, SC -- 14.00% 9.00% No --

Los Angeles, CA -- 14.00% 14.00% Yes --

San Francisco, CA -- 14.00% 14.00% Yes --

Santa Monica, CA -- 14.00% 14.00% Yes --

Taos, NM -- 13.50% 13.50% Yes $100 registration fee

Savannah, GA -- 13.00% 13.00% Yes --

Mashpee, MA -- 11.70% 11.70% Yes 4.28% STR tax

San Diego, CA -- 10.50% 10.50% Yes --


53

PRECEDENT STR POLICIES

Source: Urban Focus research of policies by jurisdiction


APPENDIX



C. FINANCIAL ANALYSIS METHODOLOGY

54


B. STR Business Models

55

1. Property Owner – The property owner is the entity whose share of ownership of the real estate asset is 51 percent or higher. The owner’s focus is to identify uses that will make the real estate asset financially viable, and to choose the “highest and best use” for the real estate asset.

Owners of STRs range widely in their size and nature. They can be owners of entire buildings and building portfolios, or they could be individual homeowners. In some cases, multiple parties will have shared ownership of an STR property, operating the unit as a joint venture.

2. Operator – The operator is the entity that oversees all operations related to running an STR unit, including managing bookings, cleaning, and coordinating with guests. There is significant variation in operator size. Larger operators may oversee hundreds of units, while others may coordinate only a handful of units. There are multiple large-scale operators working in New Orleans: Sonder, StayAlfred, Domio, Hosteeva and StayLoom are some of the major players. There are also smaller, locally based operators who work in the New Orleans market and the region. These smaller operators typically manage handful of smaller commercial properties for one or various clients.

3. Platforms – Platforms advertise and sometimes facilitate payments for STRs. Currently, the largest of such platforms are Airbnb and HomeAway (now VRBO, part of Expedia Group). There are many major and emerging platforms, and operators may use more than one to advertise their units. Platforms are usually third-party entities, though larger operators such as Sonder and StayAlfred have their own proprietary booking platforms.

Online platforms have come to play an important role in policymaking, as they can significantly affect compliance with key regulatory processes, such as compliance with permitting and payment of taxes and fees. Fees and taxes are often, but not always, collected through the platforms. Airbnb, HomeAway and Sonder’s platforms all offer to collect these taxes and fees, but smaller platforms do not typically have this functionality.

Regulatory Implications: Currently, either the owner or the operator may be the STR permit holder, depending on the business model. For instance, if adeveloper master leases a section of a building to an STR operator, the STR operator is responsible for the permit application and for the relevant STR taxes. From a regulatory monitoring perspective, tracking has thus far focused on the permit holder, though this will change as the permitting practices in New Orleans evolve to distinguish between each of the players above.

Operators often post on multiple platforms and use online tools to track all sites. For the jurisdiction, this practice makes it difficult to confirm how many bookings there are in total, or how much total revenue should be generated through fees. The operator must manage and maintain records to track all fees and taxes required. This accounting can be a significant operating expense. Some cities have elected to prohibit the platforms from collecting taxes and fees in order to manage this process through the operator or permit holder.

THREE KEY ENTITIES


Depending on factors such as size, risk appetite, access to financial resources and investor capital, and more, STR owners may adopt one of three basicbusiness models that are currently present in the market.

1. Self-Operator: An owner may choose to self-operate, typically if they have relatively few units or otherwise have the interest, ability, and resources to do so.They may still contract others to do the cleaning and other tasks, but they oversee the coordination of these activities.

2. Management Fee Operator: An owner may choose to hire an operator for a fee, typically a share of gross revenue. This share of revenue is typically 5 to10 percent for smaller local operators, and up to 25 to 30 percent for the largest and most sophisticated operators, whose high fees are due to an ability tooptimize and maximize revenue. The choice between self-operating and hiring a management fee operator is fluid, and it depends on both profitability andconvenience. As developers of both hotels and multifamily buildings begin to understand the management of STRs, many can be expected to form operatingcompanies of their own to increase profitability.

3. Master Lease Operator: An owner may choose to master lease STR units to an operator for several years. In these cases, the owner’s revenue stream istied to a lease negotiated with the operator, rather than being tied to the amount of revenue generated by STR bookings. However, the lease rent that theoperator is willing to pay is roughly based on the expected STR revenue, and it may be at or above multifamily market rents, depending on factors such as theneighborhood or the condition of the property. There is no single standard master lease contract—each agreement is a negotiation, and agreements differwidely between operators and even between units in a single operator’s portfolio. These leases also include terms around maintenance and managementcosts, based on the expected level of overall unit wear-and-tear and based on the owner’s willingness to pay for this maintenance. The leases more closelyresemble a typical commercial office lease than a standard residential lease.

MOVING BEYOND STRs

Some STR owners and operators are opting to move entirely away from STRs, to become purveyors of traditional hospitality products. InNew Orleans, several operators are increasingly operating under hotel licenses due to the lack of certainty in the STR permitting process. In several identifiedcases, these STR operators have identified properties in areas zoned to allow hotels and are self-developing properties as hotels instead of STRs.

B. STR Business Models

56

THREE KEY STR BUSINESS MODELS


Example of a self-operated project: A local developer owns and operates twelve STR units in four properties in the Uptown and Garden District areas ofNew Orleans. The developer is a joint owner in the properties, and is a sole owner of a company that operates the units as STRs. The owner was an earlyadopter of STRs, after determining that these residential units located in commercial corridors turned over regularly and did not achieve sustainable rents dueto noise levels. The owner manages these units with a small team of two office staff and six full-time cleaners. The operating costs associated with managingthe units as STRs are higher than the cost of managing them as traditional rentals, as the owner must pay for utilities, turning/cleaning costs, booking andmanagement costs. However, the net rental revenue is about 10 to 15 percent higher than if these same units had been long-term rentals.

Example of a master-lease operated project: A historic mixed-use, mixed-income multifamily building includes a mix of permanently affordable residentialunits, affordable commercial spaces, market-rate residential units, and STRs. The development also included several larger penthouses, which had difficultyleasing up due to a lack of market demand for units of that size and price level. The developer was approached by an operator to master lease the penthouseunits for five years. The master lease rents were only slightly above the projected market rents used in the developer’s pro forma, and included some additionalfees for wear and tear by the STR guests.

Example of a hotel model: One developer has restored a 200-key hotel property, and under the hotel license, the developer is operating an additional 111extended stay units through a long-term master lease with an STR operator. These units were originally, for a short period of time, contemplated to be one- andtwo-bedroom long-term market rate apartments, but the owner quickly determined that the market could not support them. The extended stay units have aseparate entrance and are managed by the STR operator, but the hotel’s services are available for additional charges. The master lease is paid upfront eachmonth to the property owner, and the terms include housekeeping, bellman service, and access to room service. The building was designed with separateamenities, but the lines between the extended stay guests and the hotel guests continue to blur. The master lease operator advertises the extended stay unitsas they would any STR unit. The hotel rooms are also advertised on the same platforms typically used to list STRs.

B. STR Business ModelsEXAMPLE PROJECTS


APPENDIX



C. FINANCIAL ANALYSIS

58


C. Financial Analysis

59

Purpose

In order to determine the financial implications of housing policies on the STR market, and to draw conclusions about the impact such a policy may have on thefeasibility of operating STRs, the HR&A team evaluated the financial value associated with STR units and tested the financial feasibility of operating STRs in NewOrleans under a number of scenarios. HR&A’s analysis is focused on STRs operating in commercially-zoned locations in New Orleans. This appendix describesthe methodologies, assumptions, and results of this analysis.

Methodology

Establishing the value premium: For commercial STR operators and property owners, the decision to operate short term rentals is dictated by the ability togenerate greater income through STRs relative to a traditional long-term rental. To understand how additional value generated by an STR may be applied tosupport housing initiatives, HR&A first defined the value premium of STRs relative to more traditional long-term rental units. Then, with an understanding ofthat value, HR&A assessed the value premium relative to the impact associated with housing policies being considered by the City. The value premium of STRsincludes value flowing to both property owners and STR operators.

Net Income for a Traditional Rental Unit

Net Income for a Short-Term

Rental

STR Value Premium

Once this value is defined and measured, the HR&A Team can assess the financial feasibility of a variety of policies by using this value impact as a threshold.

Net Income = Revenue - Expenses

APPROACH


Methodology (continued)

Geography: The financial analysis was designed to assess the STR value premium in neighborhoods across the City where commercial STRs are most active,which provides detail on how the value premium varies in different locations. Value is impacted by both residential and hospitality market conditions in eachlocation HR&A selected the eight most active neighborhoods for commercial STR permits, which together make up more than 75% of commercial STR’soperating in New Orleans and are representative of the overall market. Neighborhoods such as Tremé, although active STR markets, are comprised primarily ofresidentially-zoned properties, and therefore not included in this analysis. Neighborhoods included in HR&A’s analysis include:

Business Models: There are at least three distinct STR business models in place in New Orleans, each of which represents a different relationship between theowner and operator. For each neighborhood, HR&A assessed the value premium under each business model:

▪ Self-Operator: Building owner operates and manages units on their own. Typically a smaller-scale operation.

▪ Management Fee Operator: Building owner pays a third-party manager a share of revenues to help operate STRs. Works at all scales.

▪ Master Lease Operator: Building owner leases units to an operator, often for 3+ years. Only several larger operators do this.


60

▪ CBD

▪ Central City

▪ Seventh Ward

▪ Mid-City

This structure allows for comparison of the STR premium for all business models across the most active neighborhoods in New Orleans.

▪ Lower Garden District

▪ Marigny

▪ St. Claude

▪ Bywater

APPROACH



61

Understanding Results

Results are presented as a value premium, which is the comparison between the net income (revenues minus expenses) generated annually for a short-term rental unit and a traditional long-term rental. For example, if current net income for a tradition rental unit in a neighborhood is $12,000 per year, and net revenue for that same unit as a short-term rental unit is $14,000 per year, there is a $2,000 value premium for STRs on that unit.

The flow of a value premium to property owners and operators is dependent on the business model in place on a unit, and STRs must remain feasible for both parties in order to maintain overall feasibility.

Applying results to policies under consideration

For fee-based policies such as a nightly impact fee, HR&A calculated whether the fee applied could be supported by the identified STR value premium. Fees were deemed feasible when the average annual premium across the market could support the projected cost.

▪ Nightly Impact Fee – A nightly impact fee impacts all units operating as STRs and is applied on a recurring basis for each night an STR unit is occupied. The HR&A Team projected fees associated with a nightly fee using average occupancy for STRs in New Orleans. A $10 nightly impact fee would generate an average of $1,400 per year per unit based on the average STR occupancy of 140 nights.

▪ Conversion – Residential to STR: A residential to STR conversion impacts residential units receiving STR permits for the first time and is applied on a one-time basis at initial issuance of an STR permit. For the purposes of this analysis, residential to STR conversion fees are deemed feasible when the fee can be absorbed by the value premium over the initial year of operation of the STR. Due to long-term market uncertainty and STR permitting length of one year, periods longer than one year were not considered for feasibility.

▪ Conversion – Residential to lodging land use: A residential to lodging land use fee is applicable to buildings converting to a lodging land use. Because units in these buildings would no longer require an STR permit, the conversion fee is structured to equal the long-term value of STR housing fees, which the HR&A team defined as the present value of a nightly impact fee over 10 years. The fee would to be applied on a one-time basis as part of the approval in land use change.

APPROACH



62

Applying results to policies under consideration (continued)

For unit-based policies, which require public benefit in the form of housing units, HR&A evaluated the value premium relative to the cost of providing housing units. Results are presented as a ratio of the number of STR units required to support an affordable unit (two-bedroom unit a 60% of Area Median Income).

▪ Unit Requirement: Unit requirements impact all properties in which the size and structure of ownership allows for this type of policy. Due to complications in implementing this type of policy on properties with few units or properties with divided ownership, the HR&A Team assumes applicability of this policy only on buildings with enough units to support the affordability ratio, and with unified ownership (i.e. non-condo properties).

▪ Inclusionary Zoning (IZ) tool: Using STR permits as an incentive within the City’s IZ policy provides a means for developers of new buildings already subject to an IZ requirement to meet an STR requirement through the IZ policy. Calculation of the ratio of STR units relative to supportable affordable units follows the same structure as the unit requirement analysis.

APPROACH

Lack of established underwriting process for STRs from lenders: Unlike other incentives available to support housing (PILOT, RTA, density bonus, parking reductions), there is not an established approach for underwriting STRs as part of the cash flow of a property. Short term rentals are an emerging market type. As such, lenders and others active in property markets noted that there is not yet an institutionalize process for underwriting and accounting for the value an STR unit may provide to a property. As a result, it is difficult to impose requirements based on underwriting at the project level, as is often done for other incentives used to support housing initiatives As STRs become more established and institutionalized, underwriting practices should become more common and allow for project-specific considerations.

Variable alignment between hospitality and residential markets: The ratio of affordable units that can be supported by an STR at any given property is based on the value premium associated with STRs, which is dependent on market conditions and pricing for both hospitality uses (STRs) and residential uses (traditional rentals). Because these markets do not necessarily move in sync with one another, establishing tiered requirements tied to residential-based boundaries such as those recommended as part of New Orleans inclusionary housing policy is not possible.

Applying custom STR unit requirements at a project- or neighborhood-level is challenging for two reasons:

To account for these challenges, HR&A’s analysis assesses the ratio at which an affordable unit requirement could be supported across the most active neighborhoods for commercial permits in the city, including the Central Business District, Central City, Seventh Ward, Mid-City, Lower Garden District, Marigny, St. Claude, and Bywater. The City may choose to apply a more targeted approach to those neighborhoods that could support lower ratios.

1

2


Summary of policies evaluated

63

Current Proposed by Legislation & Evaluated by HR&A

$1/night fee deposited in Neighborhood Housing Investment Fund (NHIF)

• $5/night for residential (not part of analysis)• $10/night for commercial

Current Proposed by Legislation Evaluated by HR&A

None distinct from permit fee Apply some form of conversion fee Fee for units converting from residential to STR use


None 1:1 ratio above a 25% cap Feasible X:1 ratio, no cap


None Apply some form of conversion fee Conversion fee for properties converting from residential land use to lodging land use (hotel, timeshare, etc.)


Not an IZ incentive

Allow as an incentive alongside other incentives identified in the IZ policy, including tax abatements, density bonuses, etc.

Provide STRs with fees waived as an optional incentive

Nightly Impact Fee

Conversion Fee, → STR

Unit Requirement

Conversion Fee, → Hotel

IZ Incentive

C. Financial Analysis APPROACH



64

CBD Marigny Lower Garden

District

Mid-City Central City Seventh

Ward

St. Claude Bywater

Traditional

Residential

Traditional Long-Term

Monthly Rent$2,065 $2,115* $1,569 $1,288 $1,109 $1,153 $1,232 $1,769

Vacancy 13% 9% 8% 12% 16% 13% 13% 11%

Short Term

Rental

Average Daily Rate ($) $256 $335 $342 $218 $249 $314 $217 $256Annual Bookings 47 44 42 40 45 43 42 42Avg. Length of Stay (Days) 4.0 4.2 4.3 4.2 4.1 3.7 4.4 4.3

Note: HR&A analysis further breaks out STR ADR, occupancy and length of stay by operator type.

Traditional residential assumptions

▪ Rental pricing and vacancy is based on market data from CoStar and Zillow for the full stock of multifamily housing in each neighborhood. The current rate of vacancy varies by neighborhood, ranging from 8% in the Lower Garden District to 16% in Central City.

Short term rental assumptions

▪ Short term rental information (average daily rate, annual bookings, and average length of stay) for each neighborhood is based on market data from AirDNAanalyzed by HR&A. AirDNA data is provided at the property level. HR&A’s analysis includes only active, whole-unit, non-hotel properties in commercial areas inoperation for more than one year. Listings for which an operator, reservation count, or ADR were not provided were removed from the calculations.

Market conditions

INPUTS AND ASSUMPTIONS

*Traditional residential rents for the Marigny neighborhood are based on a limited sample of available data.



65

Operating Expense Ratio (less taxes) 18%

Real Estate Taxes (based on 10% of assessed value) 15%Cap Rate 5%

Operating CostsCleaning Fee (per bedroom, per rental) $30Utilities (per bedroom, per month) $40Fixtures. Furniture & Equipment (per bedroom)

Self-Operator $4,000Management Fee Operator $5,000Master Lease Operator $8,000

Fixtures, Furniture & Equip Useful Life (years) 10Management Fee (Management Operator only) 25%

Taxes and FeesSTR Occupancy Tax 16.2%Commercial Permit Fee* $500Nightly Impact Fee $1**Real Estate Tax Rate (based on 10% of assessed value) 15%

OtherCap Rate 8.5%Return Requirement 12%

*Only a single permit fee is assumed, per existing regulations.**Base case assumes existing $1 nightly impact fee.

Operations, fees, and valuation – STRs

Traditional residential assumptions

▪ HR&A assumes operating expenses equal to 18% of rental income, astandard market assumption for residential uses. Tax rates applied are basedon the residential tax rate in New Orleans and applied on the assessed value,which is equal to 10% of market value.

Short term rental assumptions

▪ HR&A assumes operating expenses for STRs based on frequency of rental(turns) and operator type, informed by information gathered throughinterviews of STR owners and operators. Occupancy tax of 16.2% reflects aproposed increase in infrastructure taxes on STRs, while permitting feesreflect current costs imposed on STR operators. For determining profitrequirements, HR&A relied primarily on interviews with active STR ownersand operators.

Operations, fees, and valuation – Traditional resi. units

INPUTS AND ASSUMPTIONS



66

Value premium

The average value premium across the City is approximately $4,300, though value premiums vary widely by neighborhood. This variety is a factor of the difference between achievable rents within the neighborhood’s traditional long-term rental market and achievable nightly rates within the neighborhood’s short-term rental market.

For example, STRs in the Central Business District have high average daily rates ($256/night*), but long-term rents there are are relatively high, leading to a lower overall premium to operating an STR. Based on our calculations, STRs in neighborhoods like Central City and Seventh Ward can attract higher premiums because traditional rental rates are much lower there than in the CBD, while their proximity to tourist attractions allows them to have comparable or even higher STR rates ($249 and $315, respectively). A neighborhood like Mid-City has lower traditional rental rates as well as slightly lower STR rates ($218), which leads to a low overall premium.

Neighborhood Weighted Average Value Premium

Share of Existing Commercial Permits

Estimated Share of STR Units* Operated By:

Self-Operators Management Fee Operators

Master Lease Operators

CENTRAL BUSINESS DISTRICT $1,980 28% 20% 65% 16%

CENTRAL CITY $7,290 10% 60% 40% 0%

SEVENTH WARD $7,910 8% 70% 30% 0%

MID-CITY $800 8% 62% 34% 4%

LOWER GARDEN DISTRICT $8,800 8% 58% 39% 4%

MARIGNY $6,290 7% 56% 42% 2%

ST. CLAUDE $1,870 4% 83% 13% 4%

BYWATER $1,610 4% 84% 15% 1%

Total / Average $4,360 77%

*Whole-unit, non-hotel STRs in operation for over a year

FINDINGS



67

Nightly Impact Fee

Fee Level

Annual Revenue Per Unit

Annual Citywide Revenue*

Equivalent Affordable

Units**

Financially Feasible for

Average STR?

Commercial Nightly Impact Fee

$1 $140 $255K 50 Yes

$5 $700 $1.3M 260 Yes

$8 $1,120 $2.0M 415 Yes

$10 $1,400 $2.5M 520 Yes

Residential Nightly Impact Fee

$1 $125 $835K 170

$5 $625 $4.2M 860

Total N/A $6.7M 1,380

Unit Conversion Fee

Equiv. Fee Level Fee Per UnitFinancially Feasible for

Average STR?

$1 $1,200 Yes

$2 $2,500 Yes

$5 $6,100 No

$10 $12,300 No

Building Conversion Fee

Equiv. Fee Level Fee Per UnitFinancially Feasible for

Average STR?

$1 $1,200 N/A

$5 $6,100 N/A

$8 $9,800 N/A

$10 $12,300 N/A

Fee-based policies

Nightly impact fees of $10 per night are supportable for the average STR unit in the market. Fee-based policies are ultimately tied to the average number of occupied nights per whole-unit, non-hotel STR in operation for more than a year (thus “stabilized”). The nightly fee was calculated by multiplying this number by varying levels of nightly fees. The two conversion fees were calculated by taking the present value (discounted by 3 percent) of ten years of nightly impact fees for a unit, assuming a constant stabilized occupancy rate.

FINDINGS



68

$800

$800

$800

$800

$800

$800

~ 6 : 1STRs unit at 60% AMI

$4,860

Annual subsidy per affordable unit**

Stacked STR value premiums*

*STR value premium based on lowest premium in assessed neighborhoods in order to determine feasible policy across all of New Orleans**Annual subsidy cost is based on a two-bedroom unit provided at 60% AMI***Projection of impact assumes application across all units, with no cap before requirement is applied.

The most-feasible threshold of STR units required to provide an affordable unit is a 6:1 ratio. Applying an STR value premium for the lowest neighborhood premium ($800) ensures feasibility of a citywide policy across New Orleans and addresses some implementation challenges associated with a unit requirement policy. While a lower ratio (closer to 1:1) could be feasible in some neighborhoods, the high variability in STR premiums leads to a high variability in the feasibility of using STRs to provide affordable units, not only by neighborhood, but also by property. This leads to difficulties with implementing either of the two proposed unit-based policies.

Under a 6:1 ratio requirement on applicable properties, 57 affordable housing units would be created through a unit requirement policy,assuming 100% compliance from qualifying units that currently have a commercial permit.***

1,820 913 340 . 57

Total Commercial STRs

Commercial STRs in Rental Apartments

Commercial STRs in buildings with 6+

permits

Affordable units created

x 37%, the share of existing commercial

permits with density of 6+ permits in property

÷ 6, the ratio of STR units needed to

support an affordable unit

Filtered for units self-reported as apartments

(unified ownership in multi-unit property)

FINDINGS

Unit-based policies



69

Policies Scenario Change in Number of Financially Feasible STR Units (%)

Change in Average Value Premium Across the Market (%)

Occupancy Taxes Increase from 9.45% to 16.2%(incl. $1 nightly impact fee)

-11% -30%

Nightly Fee Increase from $1 to $10 nightly impact fee -8% -14%

Total Impact 16.2% occupancy tax and $10 nightly impact fee -19% -44%

Any fee or tax imposed on STRs will have some effect on STR operations and profitability, especially for units at the margin of profitability or units operated by entities with lower risk tolerance. The HR&A Team assessed unit performance on an individual property basis to understand the share of units whose operating feasibility will be impacted by recommended policies.

The City’s proposed increase of STR taxes will impact the financial feasibility of 11% of STR units. The City is considering a proposal to increase current STR taxes from 9.45% to 16.2%. The HR&A Team’s baseline analysis assumes this increase in the tax rate to take into account how this tax will impact feasibility from current market conditions, and in conjunction with any housing requirements.

The HR&A Team’s recommended policy of a $10 nightly fee will impact the financial feasibility of an additional 8% of STR units. Imposing a fee equal to a $10 nightly fee (either through a $10 nightly fee or an $8 nightly fee and $2,500 conversion fee), will further impact feasibility of a share of STR units. HR&A estimates that a $10 fee will impact the ability of 8% of units to remain financially feasible under their current operating structure.

Together, new proposed occupancy taxes and housing fees will impact the financial feasibility of approximately one fifth of commercial STR units.

FINDINGS

Share of units impacted



70

For STRs whose feasibility is impacted by new fees, there are five possible responses to the enactment of the proposed policies, of which operators may choose a combination:

▪ Shift business model to adjust cost structure: Owners or operators may shift business models (e.g. switching from management fee to self-operation; or increasing the share of STR units) depending on what is optimal under the new regulations.

▪ Accept lower returns: Owners or operators may accept a lower rate or return, though this is often difficult if they are beholden to investor requirements.

▪ Pass fee on to consumer: To the extent that there is elasticity in market pricing, the owner or operator may raise STR prices and shift the burden of payment to the consumer. It is unclear the degree to which this can occur, some segments of tourist demand may be highly elastic and respond negatively to increases in price, therefore lowering occupancy and hurting overall revenues. However, to the extent that raising prices is possible, this is an attractive option to an owner or operator.

▪ Avoid compliance: If the reward of continuing to operate outweighs the costs and risks of operating “under the radar,” owners or operators may seek out opportunities to operate outside of the City’s established STR regulations. As the City considers new policies, it must also ensure mechanisms are in place to minimize non-compliance.

▪ Exit the market: If the owner or operator exhausts all other options for operations, they may be forced to cease operations due to an inability to be profitable. Based on current market impacts and proposed policies, HR&A expects only a small share of impacted units would exit the market.

FINDINGS

Share of units impacted (continued)

Date post:	18-Jan-2022
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New Orleans Short Term Rental Housing Study DRAFT

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